You are here

OpenMarket: Banking and Finance

  • Johnson-Crapo's Reemergence Ruins Reg Relief Bill

    May 18, 2015 5:05 PM

    Last year, an overhaul of Fannie Mae and Freddie Mac called Johnson-Crapo—named after then Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho)—went down in flames after observers found that the bill was not reform, but a massive expansion of the government’s role in housing.

    One of the most vocal opponents of Johnson-Crapo was Sen. Richard Shelby (R-Ala.), who voted against the bill in the Senate Banking Committee and blasted it in his statement in committee and it media interviews. “Shelby Opposes Massive New Regulator and Taxpayer Exposure in Housing Regulation Bill,” exclaims the headline of a press release from Shelby’s office on the date of the Senate Committee vote on May 15, 2014.

    Though the bill narrowly passed the committee, support for the bill died on the vine and it was never even brought to the Senate floor for a vote. The bill was torpedoed after vocal opposition from Shelby as well as that from 26 leaders of conservative and free-market groups who signed a letter blasting Johnson-Crapo that was coordinated by the Competitive Enterprise Institute. In addition to CEI, signatories included the Club for Growth, Americans for Tax Reform, Freedom Works, and the American Family Association.

  • Labor Department "Fiduciary Rule" Threatens to Eviscerate JOBS Act Gains for Investors, Entrepreneurs

    May 6, 2015 9:53 AM

    Three years ago, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, modestly but significantly liberalizing securities markets for investors and entrepreneurs. In signing that bill into law on April 5, 2012, Obama paid heed to the wisdom of ordinary American investors and made the case for easing barriers to their investing in startups.

    “Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors—namely, the American people,” Obama proclaimed. “For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”

    But the authors of the Department of Labor’s new proposed “fiduciary rule” don’t seem to share the view President Obama professed on investor choice in signing the JOBS Act. Rather, those who wrote the DOL’s sweeping new seven-part group of regulations that would sharply curtail choices of assets and investment strategies in 401(k)s, IRAs, and other savings plans, appear to share the mindset of Obamacare architect and MIT economist Jonathan Gruber. Gruber has been shunned by former allies since he was caught on camera boasting about how the health care overhaul passed due to the “stupidity of the American voter.”

    By curtailing investment in IRAs, the rule could eviscerate the gains entrepreneurs and savers have made from the JOBS Act in the freedom to raise capital and invest. And the authors of the rule seem to want it that way, for paternalistic Gruberesque reasons. Again and again in the rule, DOL expresses the view that American investors must be protected from their own stupidity. According to page 4 of the rule:

    [I]ndividual retirement investors have much greater responsibility for directing their own investments, but they seldom have the training or specialized expertise necessary to prudently manage retirement assets on their own.

    Therefore, they “need guidance on how to manage their savings to achieve a secure retirement.”

    Can’t savers who feel they need this guidance seek it out from a variety of investment professionals under a system with strong disclosure and anti-fraud rules? Absolutely not, says the Obama administration.

    “Disclosure alone has proven ineffective,” states the rule. “Most consumers generally cannot distinguish good advice, or even good investment results, from bad” (page 36). In fact, proclaims the DOL, “recent research suggests that even if disclosure about conflicts could be made simple and clear, it would be ineffective — or even harmful.”

    So, in the DOL’s view, the only solution is to tax these dim-witted investors—for their own good, of course—and expose financial professionals to a flurry of lawsuits and penalties if administration officials deem their advice not to be in savers’ “best interests.”

  • Gruber's Disciples Gunning for Your IRA and 401(k)

    April 21, 2015 11:32 AM

    Is Jonathan Gruber, the MIT economist who seemingly dropped out of public view after he was caught on camera bragging how he and other Obamacare architects misled the American public, now advising the Department of Labor?

    No evidence indicates that he is, but the authors of sweeping new 444-page DOL regulation that would sharply curtail choices of assets and investment strategies in 401(k)s, IRAs and other savings plans appear to share Gruber’s mindset on the “stupidity of the American voter” (a revelation National Review editor Rich Lowry aptly described as “us an unvarnished look into the progressive mind, which … favors indirect taxes and impositions on the American public so their costs can be hidden, and has a dim view of the average American”).

    Now, President Obama and Secretary of Labor Tom Perez are advancing a new regulatory and hidden-tax scheme while claiming to protect average Americans’ retirement savings from unscrupulous financial professionals. The proposed “fiduciary rule” would restrict the investment choices of holders of 401(k)s, IRAs, health savings accounts, and Coverdell education accounts.

    In a speech to AARP, Obama proclaimed:

    If you are working hard, if you're putting away money, if you’re sacrificing that new car or that vacation so that you can build a nest egg for later, you should have the peace of mind of knowing that the advice you’re getting for investing those dollars is sound, that your investments are protected.

    Similarly, a DOL “fact sheet” describes the rule as “protecting investors from backdoor payments and hidden fees in retirement investment advice.”

    Yet in practice, the rule seems premised on the Gruberite notion that American investors need protection from is their own stupidity. According to the DOL rule:

    [I]ndividual retirement investors have much greater responsibility for directing their own investments, but they seldom have the training or specialized expertise necessary to prudently manage retirement assets on their own. (page 8)

    Therefore, they “need guidance on how to manage their savings to achieve a secure retirement.”

    Can’t savers who feel they need this guidance seek it out under a variety of investment professionals under a system with strong disclosure and anti-fraud rules? Absolutely not, says the Obama administration.

    “Disclosure alone has proven ineffective,” states the rule. “Most consumers generally cannot distinguish good advice, or even good investment results, from bad” (page 91). In fact, proclaims the DOL, “recent research suggests that even if disclosure about conflicts could be made simple and clear, it would be ineffective—or even harmful.”

    So, in the administration’s view, the only solution is to tax these dimwitted investors—for their own good, of course—and expose financial professionals to a flurry of lawsuits and penalties, if administration officials deem their advice not to be in savers’ “best interests.”

  • UK Banks End Reward Programs in Anticipation of Interchange Fee Caps

    April 13, 2015 4:17 PM

    File this one under “we told you so.” The Independent reports a scale-back in credit card reward programs in the United Kingdom:

    The UK’s largest credit card provider has announced that it will no longer offer cashback rewards, labelling them “unsustainable”, after a new EU law was passed last month.

    It is thought that other companies may follow Capital One’s decision, significantly curtailing customers’ air miles and cash bonuses in response to legislation from Brussels.

    The European ruling will cap so-called ‘interchange fees,’ charged by card issuers to retailers when a debit or credit card is used as payment.

    Money reaped by the companies – such as Capital One – under this system allow them to offer customers savings or discounts.

    This is exactly what the International Alliance for Electronic Payments , a coalition that includes CEI, warned about in our letter to EU officials in December:

    Capping interchange fees has been tried in some countries around the world.  Despite claims that these efforts were for the benefit of consumers, the real world results have shown the opposite to be true. In every instance, consumers faced higher fees for banking services, a reduction in benefits and services and saw no return in the form of lower prices from merchants despite promises by merchants and policy makers to pass savings to consumers.

  • Operation Choke Point: The CFPB Is Now in Charge

    April 9, 2015 3:41 PM

    I suggested at TheBlaze some weeks ago that even as the Federal Deposit Insurance Corporation was stepping back from its involvement in Operation Choke Point, the Consumer Financial Protection Bureau was entering the fray. This now appears to be confirmed, as American Banker reports:

    The Consumer Financial Protection Bureau has filed a massive lawsuit against more than a dozen debt collectors, payment processors and related entities that the agency said failed to stop fraudulent collection tactics…

    But the potentially groundbreaking part of the case is that the CFPB also sued several payment processors, including worldwide processor Global Payments and its contracted parties, because the agency said they "should have known" about the alleged violations.

    The case is one of the CFPB's largest to date that pursues multiple different entities, some of which were not directly involved in the harassment of consumers. In that way, it resembles the Justice Department's controversial "Operation Choke Point," observers said.

    Operation Choke Point operates under the purported principle that if increase regulatory pressure, up to and including subpoenas, on the financial firms that work with suspected fraudsters, then those guilty parties will find their financial oxygen choked off. What happened, of course, was that banks and financial firms that dealt with any industries at supposed “high risk” of fraud were scared off from dealing with those industries as a class. The FDIC wisely saw the error of that approach and made it clear that this was an inappropriate approach by its regulators.

    Now, however, the CFPB is treading down the same road, telling firms that they “should know” about potential fraud from the same broad sweep indicators that Choke Point depended on. Once again, whole classes of industries will be cut off from financial services. Brian Wise of the US Consumers’ Coalition pointed out the problems in a statement:

    “Once [Operation Choke Point] was made public, and victims began coming forward, the Administration had to find a way to protect the program and its ability to prevent lawful industries from operating. Due to the lack of congressional oversight, and the unique funding and leadership structure of the CFPB, the Administration knows that it will make the perfect agency to carry on the legacy of Operation Choke Point. The Administration will continue to remove any obstacles in their way.

    “The U.S. Consumer Coalition has been warning lawmakers and industry leaders about the plan for the CFPB to take over Operation Choke Point since the FDIC took down their list of ‘high-risk’ merchants in 2014. Now everyone can begin to see that the CFPB is the nation’s most dangerous, unaccountable, and out of control agency in the federal government.”

    Brian is right. Choke Point is not over, and the CFPB is less accountable than FDIC. Two things need to happen: Congress needs to act against Choke Point and its new incarnation specifically, and it also needs to move to make the CFPB accountable to Congress, the Executive branch, and the Courts, as CEI recommended in Free to Prosper this year.

  • International Panel Outlines Problems with EU Interchange Fee Regulation

    March 30, 2015 3:49 PM

    On March 17, an international panel of experts gathered in Brussels to discuss the proposed EU interchange fee regulations that are set to be approved by the Council of Ministers in the next few months. Hosted by the International Alliance for Electronic Payments, experts from France, Austria, Lithuania, the UK, and the USA each outlined different objections to the regulations based on the own countries’ experience and situations.

    Interchange fees are the fees levied by banks and payments card networks from merchants and vendors when a consumer uses a payment card to purchase a good or service. The proposed EU regulation will cap these fees at the rate of 0.2 percent of the transaction value for consumer debit cards and at 0.3 percent for consumer credit cards. For consumer debit cards, the regulation also gives flexibility to Member States to define lower percentage caps and impose maximum fee amounts. Payment card networks will also have to separate their operations and infrastructure businesses.

    The panel, chaired by Daniel Hannan MEP (European Conservatives and Reformists) consisted of:

    • Pierre Garello, Professor of Economics at Aix-Marseille University
    • Barbara Kolm, President of the Austrian Economic Center
    • Zilvinas Silenas, President of the Lithuanian Free Market Institute
    • Matthew Sinclair, Senior Consultant, Europe Economics, and
    • Iain Murray, Vice President of the Competitive Enterprise Institute (USA)
  • Least Transparent Administration Closes Records on Fannie and Freddie

    March 19, 2015 10:30 AM

    This Sunshine Week, the administration that swept into office promising to be the “most transparent” in history was just judged by a major news service as least transparent of modern presidencies.

    An analysis by the Associated Pres found that “the Obama administration set a record again for censoring government files or outright denying access to them last year under the U.S. Freedom of Information Act.” The AP adds that the administration “also acknowledged in nearly 1 in 3 cases that its initial decisions to withhold or censor records were improper under the law - but only when it was challenged.”

    But FOIA requests are just the tip of the iceberg for this administration’s secrecy, much of which has nothing to do with the legitimate exception of national security. In Dodd-Frank, the administration set up the Consumer Financial Protection Bureau and the Financial Stability Oversight Council—the constitutionality of both of which are now subject to a lawsuit from the Competitive Enterprise Institute and other parties—to be exempt from many open meetings and (especially with FSOC) open records requests.

    But probably the most egregious example of this administration’s practicing of secrecy concerns its management of the government-sponsored housing enterprises (GSEs) Fannie Mae and Freddie Mac. In August 2012, then–Treasury Secretary Tim Geithner issued the “Third Amendment” to the GSE conservatorship. The Third Amendment would require all of the GSEs’ profits to be siphoned off to the U.S. Treasury Department in perpetuity—even after the GSEs paid back what they owed to taxpayers.

    This arbitrary action has spawned more than 20 lawsuits from Fannie and Freddie’s private shareholders. The suits charge the administration with everything from violating the Administrative Procedure Act to unconstitutionally taking property without just compensation.

    The Third Amendment has also raised concerns that the profit sweep is leaving Fannie and Freddie with very little capital reserves, furthering the chance for more taxpayer bailouts should something go awry with the housing market again. See this excellent paper by Cato Institute Director of Financial Regulation Studies Mark Calabria and former FDIC General Counsel Michael Krimminger on this point.

  • How Department of Labor's "Fiduciary" Rule Could Cripple IRA Choices

    March 3, 2015 12:38 PM

    Last week, President Obama called on the Department of Labor to “update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests.” At a speech at the American Association of Retired Persons, the president proclaimed, “You want to give financial advice, you’ve got to put your client’s interests first. “

    Yet, if the regulation the DOL is set to introduce at the president’s behest is anything like the “fiduciary” rule it proposed in 2010—and withdrew upon a groundswell of protest the next year—the government’s definition of “best interest” will likely not be in the best interest of individuals who wish to pursue alternative assets from gold to peer-to-peer loans to crowdfunding in their IRAs.

    The last time around, the DOL tried to reclassify a broad swath of financial professionals and business as “fiduciaries” even if they did not provide regular investment advice. Not only were broker-dealers covered, but so were directed custodians of IRAs, even self-directed IRAs in which investors don’t rely on any “fiduciary” advice. Once again, the freedom of self-directed IRA holders to invest in assets of their choosing, including crowdfunding ventures, may be at risk.

    Self-directed IRAs can invest in a wide range of assets. As worries about monetary policy have been on the rise, gold and silver have found popularity as IRA holdings. Real estate has long been a staple as well. The growth of peer-to-peer lending has stemmed in part from the ability to put the loans created by Prosper and Lending Club into IRAs.

    And as CrowdFund Beat and others have reported, self-directed IRAs serving accredited investors now have access to crowdfunded startups available through SEC Rule 506(c), which legalized general advertising of investment of non-public companies in 2013 pursuant to the Jumpstart Our Business Startups (JOBS) Act. When Title III of the JOBS Act or new congressional legislation legalizing equity crowdfunding for ordinary investors is finally implemented—and hopefully that will be soon—there should be no barriers to self-directed IRAs serving the masses providing access to these exciting new investments.

    Yet, much of this progress in lifting barriers to crowdfunding could be short-circuited if a broad, restrictive “fiduciary” rule comes to fruition. Last time, the proposal specifically included “appraisers” in its definition of fiduciaries, a category that included directed custodians of IRAs.

    Tom Anderson, board manager of Pensco Trust, a San Francisco-based IRA custodian that is now one of the leaders in offering crowdfunding options, wrote in comments to the DOL in 2011 that imposing a fiduciary standard “would result in higher costs and potentially fewer service providers to self-directed IRAs,” which “in turn, could result in fewer investment choices.” Anderson’s comments were written on behalf the Retirement Industry Trust Association, a trade group for custodians of self-directed IRAs, who helped successfully shelve the first DOL rule.

  • Harvard Study Confirms Dodd-Frank's Harm to Main Street

    February 10, 2015 7:31 AM

    Literally since the day the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama, my Competitive Enterprise Institute colleagues and I have predicted its harshest effects would fall on community banks. “While the bill claims to crack down on excesses on Wall Street, its harshest impact will likely be on Main Street businesses that had nothing to do with the crisis,” I wrote on FoxNews.com on July 15, 2010, the day President Obama signed the bill.

    Since then, numerous studies, as well as testimonials from community bank officials, have proven this prediction correct. Yet much of the media and politicians still peddle the myth that Dodd-Frank only hurts Wall Street, and thus, repealing or easing sections of Dodd-Frank would benefit “big banks” at the expense of Main Street.

    But maybe a new confirmation of Dodd-Frank’s harm to community banks will get attention because of its unlikely source: the John F. Kennedy School of Government at Harvard University. Two researchers at the Kennedy School’s Mossavar-Rahmani Center for Business and Government have just produced a study concluding that Dodd-Frank accelerated the decline of America’s community banks.

    While acknowledging that community banks’ share of financial assets has been falling since 1994, authors Marshall Lux and Robert Greene find that “since the second quarter of 2010—around the time of the passage of the Dodd-Frank Act—their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010.”

  • Obama Administration Learned Nothing from 2008 Financial Crisis, Mortgage Expert Says

    February 3, 2015 2:26 PM

    Ed Pinto had a depressing and revealing op-ed in The Wall Street Journal Friday about how the Obama administration is artificially creating markets for risky mortgages, using the Federal Housing Finance Agency and the government-controlled mortgage giants, Fannie Mae and Freddie Mac. Not only will this put taxpayers at risk, but it will burden prudent homebuyers through “cross-subsidies” for risky borrowers “subsidized by less-risky loans.”

    Long ago, Pinto worked as an executive and credit manager at Fannie Mae before it began buying up massive amounts of risky mortgages to pursue short-run profits and meet federal affordable-housing mandates.

    As Pinto notes in “Building Toward Another Mortgage Meltdown,” Federal Housing Finance Agency Director Mel Watt has pushed for a resurgence in risky mortgage loans, and hinted at more mischief to come in his January 27 testimony to the House Financial Services Committee, in which he “told the committee” that he expects to release by “March new guidance on the ‘guarantee fee’ charged by Fannie Mae and Freddie Mac to cover the credit risk” on the loans they acquire. 

    As Pinto points out,

    In the Obama administration, new guidance on housing policy invariably means lowering standards to get mortgages into the hands of people who may not be able to afford them. Earlier this month, President Obama announced that the Federal Housing Administration (FHA) will begin lowering annual mortgage-insurance premiums ‘to make mortgages more affordable and accessible.’

    Government programs to make mortgages more widely available to low- and moderate-income families have consistently offered overleveraged, high-risk loans that set up too many homeowners to fail. In the long run-up to the 2008 financial crisis, for example, federal mortgage agencies and their regulators cajoled and wheedled private lenders to loosen credit standards. They have been doing so again. When the next housing crash arrives . . . homeowners and taxpayers will once again pay dearly.

    Even progressive media like the Village Voice have reported on how the Department of Housing & Urban Development—especially Clinton’s HUD Secretary Andrew Cuomo—spawned the mortgage crisis by pressuring lenders and the mortgage giants to promote affordable housing, helping “plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.” A 2011 book by The New York Times’ Gretchen Morgenson also chronicles how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.”

    But the Obama administration learned nothing from this, and has expanded this risky, “affordable-housing” push. Pinto notes, lowering mortgage-insurance premiums for risky borrowers is the centerpiece of a “new affordable-lending effort by the Obama administration,” which led to the “the latest salvo in a price war between two government mortgage giants to meet government mandates”:

    Fannie Mae fired the first shot in December when it relaunched the 30-year, 97% loan-to-value, or LTV, mortgage (a type of loan that was suspended in 2013). Fannie revived these 3% down-payment mortgages at the behest of its federal regulator, the Federal Housing Finance Agency (FHFA)—which has run Fannie Mae and Freddie Mac since 2008, when both government-sponsored enterprises (GSEs) went belly up and were put into conservatorship. . . .

    As Pinto notes,

    Mortgage price wars between government agencies are particularly dangerous, since access to low-cost capital and minimal capital requirements gives them the ability to continue for many years—all at great risk to the taxpayers. Government agencies also charge low-risk consumers more than necessary to cover the risk of default, using the overage to lower fees on loans to high-risk consumers. Starting in 2009 the FHFA released annual studies documenting the widespread nature of these cross-subsidies. The reports showed that low down payment, 30-year loans to individuals with low FICO scores were consistently subsidized by less-risky loans.“

    But HUD consistently prodded the government-sponsored mortgage giants Fannie Mae and Freddie Mac to loosen safeguards against risky loans:

    In 1997, for example, HUD commissioned the Urban Institute to study Fannie and Freddie’s single-family underwriting standards. The Urban Institute’s 1999 report found that “the GSEs’ guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities.” By 2000 Fannie and Freddie did away with down payments and raised debt-to-income ratios. HUD encouraged them to more aggressively enter the subprime market, and the GSEs decided to re-enter the “liar loan” (low doc or no doc) market, partly in a desire to meet higher HUD low- and moderate-income lending mandates.

Pages

Subscribe to OpenMarket: Banking and Finance